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07/30/2006

Chicago's Approach to Big Boxes-BECKER
The City Council of Chicago recently passed an ordinance that makes Chicago the largest city in the United States to impose special wage and fringe benefit requirements for "big box" retailers. The ordinance requires that beginning next July, companies with more than $1 billion in annual sales and having stores in Chicago with at least 90,000 square feet of space will have to pay Chicago employees a minimum of $9.25 an hour in wages and $1.50 an hour in fringe benefits, such as health insurance. By 2010 these will rise to $10 an hour in wages and $3 an hour in benefits. These minimums far exceed Illinois' minimum wage of $6.50 per hours. About 40 existing stores in the city would be affected.
The ordinance was supported by 35 out of 49 alderman on the Council despite the vehement opposition of Mayor Richard Daley, who in the past could dictate the Council‚Äôs policies. The mayor is right to be opposed, for it is indeed a bad ordinance, and will hurt the very groups, African-Americans and other poor or lower middle class individuals, that supporters claim would be helped.
The ordinance will raise the cost of using low skilled labor in Chicago by Wal-Mart, Target, Home Depot, and other big retailers with mega stores. Even without it, large cities are not attractive to mega retailers because space for large stores and for the parking they require is much more expensive in cities than in suburbs and smaller towns. These big box stores are much more common in suburbs of large cities than in the cities themselves partly for this reason, and partly because many suburban communities offer tax and other financial subsidies to these stores in order to induce them to locate there.
Even if retailers with mega stores were trying to cater at least in part to the Chicago market, this ordinance makes them more likely to open up in suburbs that could be reached by some Chicagoans as well as by those living in the suburbs. Large retailers that continue to operate in Chicago will reduce their use of low skilled workers by replacing some of them by more skilled employees, and by machinery and other capital. Retailers will also try to avoid being covered by the ordinance by reducing their space to just below 90,000 square feet.
In a city like Chicago the burden from these responses to the ordinance will fall disproportionately on African Americans and Latinos since fewer jobs will be available to workers in the city with less education and lower skills. In addition, prices in Chicago of items sold relatively cheaply by stores like Wal-Mart and Target will rise because fewer of these stores will open in the city. The mega stores that remain will raise their prices because their costs will go up. Since city customers of these stores are mainly families with modest incomes who seek low prices rather than elaborate service, they more than the affluent classes will be hurt by the rise in prices and reduced availability of big box outlets.
Who would favor such a bad ordinance that will harm the very groups it is claimed to help? Support for the ordinance from more conventional supermarket chains and clothing stores is easy to understand since the mega stores drain away customers and force prices down. The absence of opposition from low-income consumers who shop at these stores is not surprising since they are not well organized to exert political pressure on the City Council.
The strong backing of the ordinance by Chicago unions is also to be expected. Unions always favor increases in minimum wages, even when as in this case the minimum only apply to some employers. Any increase in the minimum wage would raise the demand for unionized skilled workers who would substitute for the less skilled employees displaced by the minimum.
Unions have an additional reason to try to raise the costs of big box companies like Wal-Mart's since these companies do not have unions, and aggressively oppose them. Higher costs forced on non-union companies reduce the competition they offer to unionized companies. Perhaps of even greater importance, this ordinance helps demonstrate that unions have the political clout that can make operations more costly and difficult for large non-union retailers. To ward off further discriminatory ordinances, these companies could be forced to adopt a more favorable stance toward unionization of their employees.
It is more difficult to understand the aggressive support of the Chicago ordinance by most African-American members of the Council and other leaders of the African-American community. However, it should be noted that some of those who represent predominantly African-American communities voted against the ordinance, including Leslie Hairston who represents the 5th Ward (where I live). Not only will fewer jobs be available for African-Americans, but also the prices they pay for food, clothing, and many other retail goods would go up.
One explanation for why most African-American leaders support the ordinance is that they are politically allied with unions and possibly other groups that benefit from this ordinance. These leaders may recognize that their constituents will generally be harmed by the ordinance, but in return for taking this hit they expect the support of unions on issues like more generous Medicaid support that help low income families.
Clearly, this ordinance might raise serious Federal constitutional issues because of its discriminatory treatment of large retailers. Since to my knowledge the City Council has not offered any plausible reason for basing the ordinance on square footage of floor space, it is likely to be considered a violation of equal protection of the laws.
Still, ordinances like this one are dangerous not only because of their direct harmful effects, but also because they encourage future legislation that could apply similar and additional requirements to stores like McDonald's and other smaller stores. It also encourages interferences in other markets, such as the proposal now before the Chicago Council that would require residential developers to include a certain percentage of "affordable" housing units in their developments. So Mayor Daley is right to oppose this ordinance and he should veto it, even if the veto will be over ridden.

One of the reasons Professor Becker gave is particularly inspiring, that is, many African-American leaders voted in favor of the ordinance not because it would be beneficial directly to their constituents, but because the possible political trade-off which might help low income families.
From what I have learned in school, such ordinances (price ceilings and floors) are generally bad because they distort the market; however this reason Professor Becker proposed makes the school-book principles less sound, for the political trade-off between one policy and another is not entirely economical, and does not appear in most text books.
Because this issue involves much politics, I am not so certain that this ordinance will have bad effects on low income families eventually, as the benefits of potential Medicaid improvements might offset the damages done directly within the "big box" retailers--that how much damages will low income African-American families receive needs further evaluation in the first place. As I live way too far from Chicago (and the U.S.), I am not sure how much cheaper things are in those big boxes, yet from my experiences, price difference does not seem to be a big problem in China. In addition, the relative geographical locations of the big boxes and the African-American families will also matter: maybe this ordiance will result in a large flow of consumers out of the city and into the suburbs. Again, I am in no position to make precise predition because I am not familiar with Chicago, but issues like these will matter as long as we realize that besides all the apparent down-sides, there might also be some up-sides to this ordinance.
What interests me most is that perhaps a survey will take place once this ordinance comes into effect, so we will have empirical data for the issue; however, this will come from the risks taken by the African-American families in Chicago.

re: "require residential developers to include a certain percentage of "affordable" housing units in their developments"

The town where I did my undergrad gave tax incentives to developers to provide affordable housing. They then pocketed the tax rebates and rented those units to poor graduate students at market rates. Clever, ain't it.

Posner and Becker concentrate on the lowered employment options for unskilled Chicago workers. Other risks include the reduced revenue from lost sales tax and the lost ancillary jobs from firms that like to open around an anchor store, such as a Wal Mart Super Center.

Posner‚Äôs talks about how a second-order analysis might show that the new higher wages for some firms may attract a more skilled workforce. Of course if this tactic offered a competitive advantage the employer would raise salaries without this new regulation. In these industries, it may be better to hire low and then promote the best - since screening workers, especially entry level workers, is so difficult.

And perhaps Judge Posner and Professor Becker are correct that the higher labor costs in the affected firms will allow the exempted firms to continue to compete. Sort of like giving a high handicap to a poor bowler to make games more competitive. That seems to be the hope of the unions ‚Äì help the union stores compete on the basis of political clout rather then prices or wages.

In this model, all else equal, prices for goods could stay about the same and the burden of the new regulation is passed fully unto consumers i.e. grocery prices in Chicago remain 15-25% above average.

For the Chicago alderman prices stayed about the same, a few new jobs enter, and they claim success. Just ignore the jobs that might have been created or the lower prices that may have occurred.

Can the big box retailer afford to charge higher prices in inner city stores? The political reality is that a national retailer cannot easily charge higher prices to poor minority shoppers. (To compensate for the higher cost of doing business.) Remember the TV expose in Chicago about Jewel stores charging higher prices in the inner city? Why deal with that hassle and damage to your brand image?
Don‚Äôt you think the unions, through surrogates, would be screaming about the racist Wal Mart if they tried to recover higher costs with higher prices? While ignoring that union stores charge higher prices then the average national big box retailer.

I am not a fan of Wal Mart, but I do like competition in the marketplace. Wal Mart started by offering poor people in rural areas greater selection at lower prices. That helped raise the standard of living in these areas - consumers could stretch their limited budgets and buy more. Wal Mart could offer the same to the residents of Chicago. But the unions don't want it, and the aldermen do their bidding.
Another risk and cost, is to the workers who fail to get jobs. Males, especially disadvantaged males, who are not employed or in school from the ages of 18-22 are at great risk of digging a hole they will never get out of. They are better off getting a foot on the ladder instead of waiting for a "great" job.
The Wal Mart job helps them transition to better jobs. It teaches them the importance of showing up on time, how to work with others, how to manage different aspects of their life and show up for work.
I have worked with prison inmates and many of them never learned such basic work skills.
How might a Big Box fight back?
Stay out of Chicago. Limit my exposure to a few higher margin stores. Or game the system.
I could build a store under the size limit but once I build it the politicians can quickly change the requirements.
I would subcontract services. Security employees would be easy. I might even hire politically connected firms for janitorial services, landscaping, etc. I could lease space in my store to provide some services. For example, I could lease a bakery space and that company can pay its workers a lower wage then I can. I could do the same with a deli or butcher shop. Does the alderman have a daughter who can bake?
Heck I could sub contract 90% of my staff from Manpower and only directly employ 10 people in the store. A little creative staffing and they can only get me if they get half the employers in the city.
I could go the way of some Cub foods. I lease my name and supply goods but the local store is run under a license from Wal Mart (or others). That might void the impact of the new regulations. Alderman would even like that as they fight for a local license for the politically connected and ignore the new minimum wage rules.
Lastly, I wonder if alderman were affected by the minority contracts (for goods and services) and leases (for property and equipment) that many current retailers have signed to support locally powerful interests?
What a mess. What a Silly, Silly Circus. All this noise to keep poor people from buying lower priced goods and to support connected local unions.

It seems as though unions are being enormously short-sighted in supporting the big box law. If they want to unionize the big box stores, they'll have to start by unionizing at least one store. It's been hard to do that because a lot of the areas where such big retailers first made hay have very anti-union laws. However, Chicago probably is the most pro-union environment in the country. If Wal-Mart and friends are going to ever be unionized, somewhere like Chicago would be the place to get the beachhead.

If Wal-Mart can't get unionized in Chicago, it probably can't anywhere, so if unions are serious about representing Wal-Mart workers, they should want as many in Chicago as possible.

Furthermore, the argument that the City Council should enact this law to send a message to the overpaid CEOs of big boxes is silly. It is as stupid as the trade embargo with Cuba. Just as the Cuban embargo hurts the poor with no real negative effects on Castro, these laws hurt unskilled workers and poorer consumers with no real negative effect on the Waltons or Wal-Mart executives.

I don't think inflation will have much effect here, since the ordinance would only affect a limited pool of workers. However, related to what you're saying, is that such a high rate of pay should attract more productive and skilled workers, forcing smaller retailers to either match or beat the big box store wages or suffer in some other way when they lose their best workers. The distorting effect on the labor pool should be interesting.

There are reasons why additional restrictions on large coorporations might be a good idea and there are reasons why additional restrions might be a bad idea. On one hand, additional restrictions might introduce ineffeciencies and be ineffective. On the other hand, most people agree that imposing severe restrictions on governments (ie. doing away with "divine right of kings") was a good thing. It may be that what holds for governments also holds for other large organizations like corporations. In particular, that the inefficiencies that are introduced by additional regulation are outweighed by the benefits of requiring the leaders of the organization to act in everyone's best interest rather than just their own.There is a lot of vague ideological rhetoric on both sides but very little analysis based on hard data and precise analysis. I like the idea that Chicago is going to try this because it will allow theories on both sides to be tested against actual reality. Do the stores hire less workers? Are there less stores? Do more of the profits go to the workers and less to the CEOs?I could understand opposition to this if these restrictions were going to be applied across the whole country but, as it is, to the extent the people on either side are interested in truth, I would expect both sides to support this as an opportunity to prove their theories correct. Furthermore, these policies can be adjusted to reflect whichever theories are eventually proven correct.

This situation is reminiscent of Chicago's passage of a landlord tennant ordinance essentially re-writing the terms of leases, supposedly to promote health and safety.

That ordinance was ill-advised because there was no cap on the landlord's ability to pass the burden on to tennants by rent. Here, there is no way to stop the retailers from limiting their demand for workers or looking to different sources of labor, such as the more skilled sector.

This bad habit of passing ordinances with best intentions and little analysis needs to be broken.

I should add that, as a law student, I am biased towards Posner-deference.

It seems like Becker has never lived in an African-American community in a major inner-city. The small businesses that exist in that area are primarily owned and operated by low-income African-Americans. The same is true in low income hispanic neighborhoods. These large "box-stores" are able to push several of these business owners out of business at once by undercutting their prices through lower than living wages. Entirely to the contrary of what Becker claims, if "big box" stores are required to pay a living wage, many of the small businesses in the inner city neighborhoods will have the ability to compete once again and the economy of these inner city neighborhoods will boom.

Becker also claims that robots and other machines will replace employees in these large stores because they will be more efficient. Most employees in large retailers are focused solely on customer service. That is the nature of large retailers. Everything that can be done by machine is already being done by machine. Is it not the job of business to be as efficient as possible? If there was a way to remove employees and replace with lower cost machines, these businesses would have already done it. The one thing that cannot be done by machine is the exchange between human beings that helps the consumer relax and trust the entity with which they are doing business. The only reason to trust such an entity is if one can trust its employees. This is why people still go to bookstores despite the better abailability and prices at Amazon. This is why people still go to junk shops, despite the prevelance of ebay. People are a necessary part of the economic process. Few, if any at all, employees will be let go because of this law change. And large "box stores" are not able to withdraw from the Chicago area, so I doubt that will happen, although that would be beneficial to the local economy, especially of the small minority owned businesses in the area.

This law is another proof that economy and conscience are usually on the same side, despite how intellectual elites try to separate and confuse the two concepts.

"One explanation for why most African-American leaders support the ordinance is that they are politically allied with unions and possibly other groups that benefit from this ordinance. These leaders may recognize that their constituents will generally be harmed by the ordinance, ..."

I remember the days of the MLK Jr.riots in Hartford, CT when blacks burned, tore down and looted the very stores they shopped in. When it was over they protested that they had no place to shop.

With regard to your mention of policies "requir[ing] residential developers to include a certain percentage of "affordable" housing units in their developments:" do these really never work? Is there any method by which the current (poor) residents of a neighborhood undergoing gentrification can be maintained there to reap some of its benefits without costing too much to be worth it? I would be fascinated to read your thoughts on the subject.

Am I the only one that is more disturbed by the higher prices this ordinance implies than by its possible employment impacts? Why would we want people living in the city without personal transportation paying higher prices than car owners? Why hinder big-boxes from moving in and increasing the standard of living for every Chicago consumer by lowering prices?

"If there was a way to remove employees and replace with lower cost machines, these businesses would have already done it."

True. However, if you increase the cost of labor by passing such an ordinance, then machines could become the lower-cost option. If an hour of machine costs $7, it doesn't pay to use it right now. If you pass this ordinance, the cost of using the machine is lower than the $10 wage, and retailers will switch as much as they can to capital rather than labor.

Additionally, the "living wage" provision would not raise the standards of living in Chicago except for those small business owners directly competing with big box retailers. Exempt from the provision, they have more labor hiring flexibility, and they can compete in price because big retailers have to pass on higher labor costs to consumers. The people who would suffer are all those Chicagoans, white and black and brown and any other shade, who don't own small businesses that compete with Walmart and Best Buy. Teachers and policemen and secretaries and deliverimen and all the other workers in a city economy lose out with this ordinance. They have to pay the higher prices, either at the small business or at the big box retailer with higher labor costs. Their income doesn't improve because there is no provision increasing their wages or salaries. What this ordinance ultimately achieves is a transfer of wealth from consumers to the competitors of big box stores and is essentially another case of special interests getting their way in politics.

Totally agree with Becker's analysis, but I would not put labor unions as the only party benefiting from raising a Wal-Mart's cost: small hardware, retail and other stores probably are rooting for this legislation to protect them as well from an otherwise more efficient rival.

I like the blend of law and economics in this blog because they are both so murkey.

In economics there are some rules which have effect no matter what the current theroy says. Gresham's law says "bad money drives out good."

Pass all the laws you want, silver coins go away when the composite hits the market. It hardly seems fair to set up an a City just so we can get some data.

What I would like to see is data on how a mandated wage increase effects inflation. If the market sets wage rates (even some of us liberals believe in the market) would not the market correct a legislative increase in the wage rate?

If the City Council can control one price they can control another. To wit, how can Chicagoans -- and the working poor especially -- afford gasoline at today's prices? I propose an ordinance that would prohibit the sale of gasoline at prices above one dollar per gallon within the city limits.

With Chicago's prices substantially lower than in the surrounding communities, people will come from all over northern Illinois to buy gasoline. Business at the city's gas stations will boom, and any losses due to lowered prices will be made up in increased volume.

Every time you fill up at $3.30 per gallon, reflect on the fact that the City Council has the power to provide relief, yet has not done so.